Photo credits: 89Stocker

On Wednesday 2 November, Europe Calling organised the webinar ‘ECT: Reform or Exit? - What next for the climate-damaging Energy Charter Treaty?’. The webinar was promoted in cooperation with Anna Cavazzini MEP (Greens/EFA Group), with the aim of taking a closer look at the Energy Charter Treaty (ECT) and delving into the current debate on whether to reform or exit it. In addition to Cavazzini, the webinar featured speakers Christina Eckes, professor of EU Law at the University of Amsterdam, and Fabian Flues, trade and investment policy officer at the NGO PowerShift.

The key message of the seminar was that the ECT needs to be exited, although this is not so straightforward. What is clear is that the current ECT is in breach of EU (climate) law. Therefore, as Professor Eckes claims, there is a legal obligation on the EU and Member States to end this illegality. There are no apparent direct implications for workers and trade unions from the debate on the ECT, but on closer inspection, this treaty has severe indirect consequences for the idea of justice in the transition away from fossil fuels, as well as for the outcomes of this transition and who should shape it.

The ECT was signed in December 1994 and entered into force in April 1998. The EU and Member States are contracting parties. The rationale of the Treaty was to protect investments in the energy industry, which was and still is dominated by fossil fuel and financial strongholds. When the ECT was negotiated, it was not yet practice to differentiate among energy sources according to their compatibility with climate policy commitments. At the core of the ECT is the Investor State Dispute Settlement (ISDS). While Article 27 sets out the provisions for dispute resolution between two contracting states, Article 26 of the Treaty provides express provisions for resolving disputes arising under the Treaty between an investor of a contracting state and another contracting state.

As a result, contracting states can be sued by fossil fuel investors, even if they take democratic decisions consistent with the Paris Agreement and the climate neutrality goals. The decisions by arbitration courts are binding for contracting parties: governments tend to pay (and usually a lot of money) if they are convicted. The enforcement of arbitration awards may happen through national courts. This system creates a problem of legitimacy of arbitration courts: they operate outside the normal EU constitutional framework, with their only purpose being to protect investments in energy assets.

In 2017, contracting parties (from Europe, the EU itself and the Member States) started a reform process, the results of which are to be adopted on 22 November 2022. The reform process is very complex because consensus is needed among a wide number of stakeholders, including non-EU Member States. Poland, Spain and the Netherlands have decided to leave the Treaty; Germany is about to decide to quit, too; Italy left in 2016. However, simply leaving the Treaty might not be resolutive. If a party leaves, there is a clause (a so-called ‘sunset’ or ‘zombie’ clause) that investments in fossil fuels can be protected for 20 years (Art. 45(3), letter b of the Treaty). Italy is an example: despite having left the treaty in 2016, the country has just been sued by a UK investor for having stopped drilling oil. This is why the Commission has said that voice and reform would be better than exit.

Among the reform proposals, there is the idea of an interstate modification agreement, under which the parties (including the EU) agree that in case of exit, they do not apply the sunset clause. The Commission is pushing for the alignment of the ECT with the Paris Agreement and the EU environmental objectives (info here). The modernised ECT would allow the contracting parties to exclude new fossil fuel-related investments from investment protection and to phase out protection for the already existing investments. This phasing out of protection for fossil fuel investments would take place within a shorter timeframe than in the case of a withdrawal from the ECT, for both existing and new investments: existing fossil fuel investments would be phased out after 10 years under modernised rules (instead of 20 years under current rules) and new investment in fossil fuels would be excluded after nine months. Most importantly, the Commission proposal includes several provisions on ‘sustainable development’ which would persuade the contracting parties to refrain from waiving or derogating from labour and environmental standards in order to encourage trade or investment (see here for details).

In the meantime, on 24 November 2022 the European Parliament adopted a resolution on the outcome of the modernisation of the ECT, urging the Commission to immediately initiate the process towards a coordinated exit of the EU from the ECT and calling on the Council to support such a proposal.

While this debate about whether the ECT should be exited or reformed is going on in Europe, 40 countries from the Global South are currently candidates to join the Treaty, including China, Indonesia, Chile, Iran, Iraq and many African countries from the Sahel region. As Fabian Flues noted, these countries and their economic branches hold massive fossil fuel assets to be defended through the ECT, with a risk of exacerbating North-South distributional tensions in the energy transition.

In principle, the ECT also protects investments in renewables. Litigation on renewables is in fact frequent under the ECT, probably even more so than fossil fuel litigation. Yet the dispute-resolution mechanism tends to favour corporations in the renewables business and investment funds rather than local communities and small investors, who are normally more reluctant to litigate. And overall, there is no evidence that the ECT increases investment in renewables.

On the website of the Treaty there is a section about all investment dispute settlement cases (see here and here).

The webinar was recorded and is now available on the Europe Calling website.